A cautionary case on lending 40k against a spec home with no lien and no recorded terms

The word you want is position. When you lend against real estate, the loan can be recorded against the property so that if things go wrong you have a claim on the house itself, and whoever recorded first gets paid first out of a sale. Your builder had a construction lender who was almost certainly first. You were behind them and behind anyone who filed for unpaid work, except you weren't even recorded, so you were behind everybody and had nothing but his promise.

I almost did the identical deal two years ago, same structure, a friend of a friend and a letter. What stopped me was asking who else was owed money on the project and getting a vague answer.

The 2,100 tells you what you actually owned. You had an unsecured promise to pay from an individual, and your recovery depended on his cash at closing and his willingness. That is a very different instrument from a secured loan even at the same stated rate.

How the secured version works. The loan gets documented with a promissory note, and a mortgage or deed of trust is recorded against the property in the county records, which is what gives you a claim against the house rather than only against the person. Priority generally follows recording order, and the construction lender in a build like this is normally first, so a gap lender is second or lower. Mechanics lien priority is one of the places this gets complicated, because in some states an unpaid contractor's lien can relate back to when work started and outrank a later recorded loan, and the rules differ state by state. Foreclosure process and timeline also differ by state, judicial in some, non-judicial in others.

The other things a secured gap loan usually carries: a personal guarantee, a defined maturity date with default interest after it, a mechanism for you to see the budget and the lender's draw schedule, and the right to receive notice if the senior loan goes into default. None of that is standard, all of it is negotiated.

Drafting a note and recording a security instrument correctly is work for a real estate attorney licensed in the state where the property sits, and pooling money from multiple people to lend can raise securities questions, so get that reviewed before you do it again. Whatever a borrower tells you about rate, term, and position, get it in writing before funds move.

Before funding a gap on a ground-up build, the right move is to ask for the same file the construction lender has. Line item budget, what has been drawn, what is left to draw, and the appraised as-completed value against total project cost. If the builder's own equity is thin and the gap money is what keeps the job alive, that lender is equity taking a debt return, which is the worst seat there is. On the specific deal, marlow, 12 percent for ten months on a first-time relationship with no lien was never a passive income product. The rate was the tell. Nobody pays 12 for money that is safe.

2,100 on 40k over 22 months works out to about 2.9 percent annualized. That's roughly what an unsecured personal loan to a friend pays, which is to say the lender was paid nothing for the risk taken, and the risk was total loss, since a construction loan with nothing recorded and no schedule leaves a private lender standing behind the construction lender with no filing and no leverage. The thing worth knowing in a case like this is whether the stated rate was ever payable monthly. Interest accruing to the end means the entire return depends on one closing going right on one day.

Twenty-two months on a single house usually has a land or permit story underneath it that predates the truss delay. Worth asking him when he bought that lot and what he paid to hold it, because if the lot had already been sitting for a year the project was carrying dead time before you ever wired money.